Is Severance Pay Considered Compensation?
Severance Pay
Severance pay is compensation that an employer gives to an employee when their employment relationship ends, typically because of a layoff or downsizing. It’s rarely offered to people fired for misconduct, though. Employers may offer severance pay to reduce the impact of termination on a departing worker and help them find a new job, or they might need it as security to prevent employees from filing an employment discrimination lawsuit.
The amount of severance pay can vary, depending on the position and years of service an employee had with the company. It can also depend on the industry and whether the company is in a good or bad financial situation. It’s also important to note that severance pay is considered income and, thus, subject to taxes.
Employers can either decide to withhold state and federal taxes from severance payments, or they can add them to regular wages. Either way, the money is considered taxable income and the withholding will be based on the employee’s tax bracket. Some employers will choose to make severance payments in a lump sum and other times, they will spread the payout over several pay periods. A lump sum will save the employer the cost of paying a withholding fee over several pay periods, but it could also push the employee into a higher tax bracket. If the employer is going to withhold taxes from severance pay, they will usually notify the employee of the deduction.
Is Severance Pay Considered Compensation?
Unless the employer specifically states in an employment contract that the employee has a right to severance pay upon termination, severance payments are generally not required. However, if the employer makes a verbal promise to give severance pay to workers being laid off or dismissed or they include it in an employee handbook, the employer is legally required to honor that contract and provide severance payments to affected employees. If an employer does not honor a written or verbal contract, a Los Angeles workplace attorney can file a claim for breach of employment.
Companies that do give severance pay lawyer will often require the employee to sign a non-compete or other confidential information agreement in exchange for the payments. The employee should never agree to such an arrangement without consulting with the attorney first.
It’s possible to negotiate a severance package, but it’s not always easy. Some companies take a “take it or leave it” approach and will not consider changing the original terms, while others are open to negotiations. The best strategy is to research what other companies in the industry are offering for severance packages, and then to use that as leverage when negotiating with your own employer.
Some severance packages come with additional benefits such as outplacement services to help a departing employee land a new job, or payment for unused vacation and sick days. Other perks might include the option to keep company equipment such as a laptop, or the ability to keep stock options. Employees are free to accept or decline these offers, but they should discuss them with a Northwestern Mutual financial advisor to learn what impact accepting or declining them might have on their long-term retirement plan.
